OF COIVIIVfERCE
. ··L~'J~~Y
' 'H"!/r~ r(~-\
-L
P.CI BOX Hi? CHRiSTCHUHCi-i, NEVi ZEALAND
The vielNt expressc:i in this Bulletin ere I'lt{! Vle-W9 of !ke
cu:hor lind not nccc'ssaril)' those 0/ the Chc;,-noer of Commerce.
BULLETIN
No. 577
3/1974
VERSY
by PROFESSOR OWEN MCCARTHY, M.AGR.SC., PH.D.,
Head; Department of Agricultural Economics &.l'vlarketing, Lincoln College
A. IN'fRo»uCTION
The most controversial topic In the wool industry
over the last 5-10 years has been marketing reform, in
particular the question of wool acquisition. Briefly,
acquisition means the setting up by legislation of an
authority to acquire compul:oori:ly and market all New
Zealand wool. Although tl;(~rc are many interpretations
of precisely whatfun;:;tions the aut.~ority would undertake, the key proposal is that it assumes ownership of
the wool at an early stage in the marketing process.
Similar marketing reform schemes for wool have been
under scrutiny in South Africa and Australia. However,
in both these countries the agony seems over and action
has been approved by t110 majority of those involved in
the industry.
This paper is mainly concerned with outlining the
cases for and against acquisition.
IThe irst seetio:! provides background on t.1C structure and organization of the wool industry in New
Zealand and traces the recent nro~~ress of wool marketing and reform. The second 'section briefly describes
the world textile market of which wool forms a relatively smaH part, examines the competitive position
of woo! in this market and outlines an ideal marketirlg
system for wool withil1 such a context.
The third section describes and comments on various
wool market rdonn proposals and puts the case for
non-acquisition, that is, the status quo, with minor
variations.
.
B. BACKGROUND
1. Structure and Organization of the New Zealand
Woollndusfr}'
Annual N.Z.· woo] production averages around
300,000-330,000 wnnes from about 60 million sheep.
The present value of production is about. $400 million.
111erc are about 38,000 wool growing farmers but wool
and sheep meats are the major source of revenue for
only about half the farmers.
Most New Zealand wool is of the coarser crossbred
type mainly used for household or industrial purposes
in contrast to finer Australian \vools 11sed mostly for
apparel.
The sheep farmer has the option of two major
avenucs of disposal. He m.ay seU at auction or to private
buyers. About 80 per cent is auctioned (mostiy in New
Zealand but a little is shipped to the u.K.) and the
remainder is sold to private buyers. These perce11tages
do not .include wool from she~p and hlmb$ slaughtered
:.. ""'lew Zealand (known as sEpe wool) hut disposed of
outside the auction system by freezing companies and
amounting to about 0.3 million bales of a total dip of
2 million bales.
If the auction option is preferred the wool is
delivered to brokers' stores at one of the eight wool
selling ccntres. '.ole broker's fUIlction is to prepare and
display wool to best advantage for inspection by buyers
(acting as agents for local and overseas users) who
then bid for it at auction. Buyers pay for wool usually
within 18 days of sale and brokers then pay net proceeds to farmers. Buyers may have wool scoured prior
to overseas shipment. About 40 per cent of wool
exported in 1972/3 had been scoured.
TIle New Zealand Wool Marketing Corporation
which is the statutory Marketing Authority in the
industry has a floor price scheme for wool under which
it vIm buy in or supplement the price reached at auction
up to a conservative level. The Corporation 1s also
charged with improving the marketing system although
as yet it has only made t:mid steps' in reform.
The New Zealand Wool Board is the policy making
body for producers. It is dominated by grower members who are elected by an Electoral Committee made
up of 25 growers, in turn chosen o.~ a district basis by
farmers with 100 or more sheep. The electoral committee also elects grower members to the Meat Board.
On the buying and processing side the brokers and
buyers each have an Association to represent their
views. There are also a Wool Merchants' Federation
and a \Vool SCOUTers' Association.
2. Marketing progress and reform
A precedent for acquisition, a1beit dubious, can be
fmmd in the primllry produce inter-Governmental bulk
purchase contracts of World War n. In the case of wool
the New Zealand-United Kingdom contract covered the
clip for the duration of the war and one clip thereafter.
Prices paid were in general those niling before the war.
Because of thi'. dislocation of: normal trading conditions
substantial stocks of U.K. Government owned wool had
accumulated by the end of the wac. To dispose of these
stocks with minimum disturbance to future supplies
the Governments of the United Kingdom, Australia,
New Zealand and South Africa fomled a private
company called Joint Organization. Its New Zealand
subsidiary was the New Zealand Wool Disposal Commission established under a 1945 Act. As well as
disposing of the accumulated wool at auct:ons (which
had recommenced after the war) the Commission
established floor prices and was prepared to buy all
\\"0] \\],ich did not reach these prices. By mid 1951 all
New ZC~11aild Joint Or;!:mizatioll wool had been sold at
a profit of arollnd S>1Z40 million. In J.9S1 a new Wool
Commission repbccd the old. Its major function was to
administer an expanded reserve price scheme. The
reserve fund consisted of the Joint Organization profits
plus S13 million oj industry funds. The Commission
appraised all wool sold and set a floor price for each
lot, at which it was prepared to buy in jf not bought by
a commercial buyer. (In 1967 a further support price
procedure was added. Instead of buying itself, the Commission could wpplement the auction price for wool
bought by others up to the floor price. And in 1969 a
third option was adopted to permit the Conmlission to
buy in below the iloor price.) Naturally the average
floor price tended 10 be conservative. For example, in
1952 it averaged 24d compared \vith average auction
realisations of 40cl and in 1957 the corresponding
figures were 30d and 55cl.
It was not until the 1966/67 and 1967/68 seasons
that, due to falling demand, the Commission was
forced to buy or supplement substantial quantities of
wool. In mid 1966 the Commission's capital was $74million. By November 1967 this was completely
exhausted, the Commission meantime having had to
buy in around 700,000 bales. In addition a further
$9 million borrowed from the Reserve Bank had been
sp(',nt on supplementation. Subsequently although wool
prices did not rise substantialJy Ull.til 1972-3 only about
20,000 bales had to be bought in by the Commission.
All stocks had been disposed of by the end of 1972.
From commencement in 1951 until the end of its operations in 1972 the Commission bought 835,000 bales
and supplemented 987,000 bales at a cost of $10 million out of a throughput of approximately 28 million
bales.
·d~
Meantjme back in 1964 the Wool Board and Wool
Commission had set up a study group of wool motiv~
atcd expclis to examine the causes of wool price fluctuations, to seek their minimisation and to report on
methods of wool marketing. 111e group presented its
final report in November 1967. It recommended that an
appraisal and purchase system be instituted under
which all \vooJ would be bought by an authority through
existing channels. The Board and Commission then l;et
up a "practical" group to examine the fmdings and to
make further recommendations. Its Report of November ] 968 rejected an acquisition authority but recommended lesser changes. Controversy on wool marketing was by this time at its height ~jth wool prices at
the lowest level for 20 years. After further discussion
the Wool Board in December 1970 commissioned the
Battelle Institute of Ohio, U.S.A. to make yet another
detailed study of all aspects of the wool industry. The
rationale was that a dispassionate objective study by
an outside group was required. Its report became available in August 1971 and recommended major changes
in the marketing system designed to reduce fragmentatiOll and provide more centralist:"i decision making. The
Board and Government then set up the Wool Marketing
Establishment Company to determine the most desirable form of marketilH~ or~::anization. After discussions
in New Zealand ~md "ove;seas the Company recomme~(kd a grower contro1led Marketing Corporation
WhICh would acquire all shorn wool from July 1973 and
other wools at a later date. The plan was approved by
the Electoral Committee and the Meat & W00l Section
Comleil of Federated Farmers. At this stage vocal
groups of dissident fanners sprang up around the
c()Untr~T and joined together to form the Wool Action
Cornnllttce. As a resalt, legislation setting up the Cor-
poration was delayed because the Government CuHsidered wool grower support was not strong enough.
After some hesitation the Wool Board then proposed
to Government that the acquisition clauses of the Dill
be deferred pending a referendum of grmvcrs. Accordingly the Corporation, which also absorbed the Wool
Commission, came into being in December 1972 but
without the power of acquisition. Subsequently the
Labour Party became the Government and repealed the
referendum clause.
Nevertheless the advent of acquisition is still
uncertain. The Corporation requires a 12 month planning period, a majority on the newly elected Electoral
Committee do not support it, and the Wool Board has
said that acquisition would come only with the approval
of a clear majority of the latter Committee and the
Meat & Wool Section of Federated Farmers .
C. AN IDEAL MARKETING SYSTEM FOR WOOL
1. General
The numerous proposals that have been put forward
over the years for marketing reform can oIlly be properly evaluated in terms of needs in the market place.
This requires examination of the world textile market
of which wool forms a relatively minor part and is in
direct competition with synthetic fibres.
(a) Supply and price trends for fibres:
1973/4 estimates are that total world fibre
production is around 25,500 million kilograms,
of which synthetics account for 11,400 M,
cotton 12,700 M and wool 1425 M. Thus wool
is under 5 per cent of the total. Although wool
production has been relatively steady since 1960
and cotton production has only increased
slightly, synthetics have increased by 500 per
cent and are continuing to capture a larger
share of the expanding market. Wool is being
seriously challenged because of its relative
inelasticity of supply.
Further, prices :..or wool fiuctuate widely and
erratically compared with man-made fibres or
even cotton. Consider the ten year period
1963/4 to 1972/3. New Zealand wool at
auction averaged $1.01 per kg. gr~asy in
1963/4, dropped to a low of 50 cents in
1967/8, rose to 62 cents in 1968/9, dropped
again to 53 cents in 1970/71 and rose to $1.44
in 1972/3. Nylon started at SUS2.73 per kg.,
fell steadily to $2.12 in 1967/8 and has
remained at that list price at least until recently.
Similarly, polyester started at $US2.51 per kg.,
dropped to $1.34 in 1968/9 and has remained
there. Even cotton has fluctuated only within a
range of from US63 cents to 88 cents. In summary, wool to a textile user is relatively scarce
and relatively price unstable. It has of course
other advantages which may compensate.
(b) Fibre marketing systems:
(i) Wool .
New Zealand wool is produced by 38,000
independent producers. If sold by auction
it is transported to 8 different selling
centres. There in warehouses operated by
wool brokers (23 throughout New Zealand), it is visually classed into some
hundreds of types and displayed for subjective valuation by up to 80 buyers plus
floor price appraisers. Post auction, the
brokers acting under instruction from
buyers, may arrange for dumping (compressing two or three bales into one) at
one of a number of facilities and transport
to stora:c.c at dispersed loc:lti()J1~ until
export. i( soid privately, wool mcrcilants
process their wool through some of these
stages. As the bulk: of miction wool is
sold between September ~Ind June and
mills require wool throughout the ye:tr,
they need to provii:e stOfCtgC. Further,
users are located far from New Zealand.
Our main 1lSers arc the E.E.C., followed
by U.S.A., Japan and Russia.
Promotion, market and product research
and development and technical services
are provided by a wide range of organizations of varying competence, including
the \Vool Board and Corporation, the
Wool Research Organization and the
International \Vool Secretariat. IvIarl~eti!1g
strategies arc usually widely publicized
and debated before being put into
operation.
Wool marketing operations are thus
complex and costly with responsibility
for preparing and moving the clip fragmented among many groups. The variabJe
quality and price flows unevenly to the
user.
(ii) Synthetics marketing system
Synthetic fibres arc produced and sold by
a small number of large firms direct to the
user. Production plants are located relatively close to users. When demand
exceeds supply (and hence is likely to
affect price), users can be rated and given
priority on the basis of present and future
requirements and reliability. Price is set
by the producer based on competition and
long term marketing strategy. Decisions
on promotion and market research and
development are made within indi"idual
organizations so that competitive ajvantage is retained.
(iii) COttOIl marketing system
After ginning, cotton is generally sold by
farmers' agents direct to spinning mills at
a negotiated price. The relative stability
of world cotton prices is partly due to the
ability of producers to respond quickly to
price changes (the production period is
short) and partly to the price stabilisation
policy of the (..l.S.A. Government which
involve~ stockholding.
2. The performance of wool in fibre competition
The competitivenE'ss of wool in the world textile
market is influenced by a number of factors including
the following:
(i) Fibre properties:
Cl-irical fibre properties include utility and
processing dbility. By utility is meant the
characteristics imparted to the end product. It
is here that vi001 continues to retain its relative
advantage. However in processing, wool is
inferior to synthetics. Disadvantages include
the number o[ primary processing stagcs necessary before it is rcaely for spinlling, its relative
weakness necessitating slow processing speeds,
iis high specific gravity and hence lower output
and the fairly bigh degree of waste.
(ii) Fibre availability:
Wool is generally more inflexible in supply
than synthetics and the location of supply is
distant from
countries.
the
major
textile
producing
(iii) Price:
Price fluctuates widely due mostly to fluctuating demand occasioned by the general level of
economic activity and to inelastic supply.
(iv) Spcci{icafioll:
Without objectivc measurcment accurate specification of' quality (and hence a repeatable
product over time) is not possible.
(v) Handling and distribution:
Unlike synthelics wool does not provide
prompt delivery time in clean and homogeneolls packages which are easy to handle and
store.
(vi) M ark.ct information and development:
Detailed, up-to-date information, readily available to all, on user requirements and a coordinated world-wide strategy for market
development, is not provided by the present
wool marketing system, although the I.W.S.
should be doing this.
On balance these factors are resulting in continuing
erosion of wool's competitive position in the world fibre
market place. Therefore some change in the present
wool marketing system is imperative.
3. An ideal wool marketing system
On the basis of the considerations discussed, criteria
fo,: an ideal wool marketing system include:
(i) Provide users with wool of a specified and
repeatabie type at the required place and time,
uniformly packaged and at a stable price.
(ii) Ensure a favourable production environment
for wool growers by stabilising prices.
(iii) Increase the efficiency of the wool handling,
selling and distribution system so that associated costs are as low as possible.
(iv) Ensure an improved information flow between
user and producer.
(v) Undei"take further market development.
However, unless central and direct management and
control can be exercised in assembly, sale and disposal,
it is not possible to satisfy all the above criteria.
In essence this is the justification for wool acquisition.
D. MAJOR NEW ZEALAND MARKETING REFORM
PROPOSALS
1. The Wool Board/Wool Marketing Corporation Plan
Recall, the question of acquisition is still unresolved.
However, the functions and powers of the Corporation
were set out in a major policy statement by the Wool
Board in May 1972.
These are:
To acquire wool and market it in any manner
thought best within and outside New Zealand.
To develop greater efficiency in preparation,
handling, processing, distribution, shipping and
selling. The Corporation may itself engage in these
activities.
To develop existing and new markets, to provide
information on market requirements and to
encourage production of wool suited to these
requirements.
To administer a minimum prices scheme.
At the same time the Corporation's method of operation was rather vaguely outlined. Presumably the vagueness was intentional. The Corporation was not then in
existence and its flexibility and competitive advantage
could have been compromised. Also no doubt detailed
operating procedures just were not known.
~)t~tlcnh';;
'"rLc
L(;C!L;l~'
t)I( l"~J_
rccej\:c \voul.
i~:~'i '" j.~"
:,~:.~
SL!i;~:-!;(:d
to
th(.~
intention to
] . ././,:::.;
fr{'{~d()1n.:
1 h\~.; lS tIie. rn:ljo;' ;lrgunh:nt of gl u\\'crs ~'tnd lh(~
\\'0<..11 ;\ction Conlfnittcc ar~~UIllCJlt. :Frccdn!11 js
th:.:: ri~'.ht of the l)fOduccr to (;jl()J~:c. to \ . . h\)li~ L1~\~
\\'"001 ;;hould be. so]d~ in \vhal j'c;rrn, ;:lL \\'hat linit.:
and at \vhat pricc'. }-10\\"CVCL th(~ CXi~~tl~H~ systcrn
doC's not perlllit cumplete r;'ccdol11 of C~h(JlcC in
(.;·.:~l]~L~
j L \\';,":::1.,:
to (let on its b~">.h~.:dr to
then b:.; ~:Pi)rai~:cd and the pro-
ducers paid p~'Oi~~;~~~y \in "ibis b.:1Si:;,
SubSCqUC;il;Y ~i; ':!'
uisiticlH Ji~:~: reduced the Corp:->ration to the :-,t::l:.~:-'
p~lp'2r tirl:r. II is nov/ jn ihc
~,(;('()nd
:yc;:-ir of j;s c.\i~.:tcI1cC and jl:l:) been (:fTcc!lvcly
jnefl'c-ctua1. ]~o si~I.;·iif~c.t11it cbanzc;; jn n'!arketing have
uecn rnadc. !\. scLt:!llc. for co!n~")inlng slnaJI lots has
been announced
all these matters.
2.
~~nc1
the: C\)rpnration is buying slnall
('L,:;tntitics
(')f n'c)c,J frij- "..'~1:1f J"L c,",'ji, ·"1"'J'l;.f,\oI.l !·;-j0
1
b ~eYl'v~r;no.
......
i11cntS. Pians for (:~qui~1jti()n ;~re a :little 1110re definite.
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.1le aucuon
sys,(';n
\\'OUJU
con ll!H;C
1
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\Vltn
.........
~
i
L1C
\.....orporarl
sole vendur, picduccrs havj;;g delivered their
wool through the nis!iIlg channel:;. Froducers would
receive a SChCC1liL.: price Flus ]'o::;~,ib!y an cnd-of-season
p(~ylnenr. Pri \'(1 tc. buyers 3.nd co-operatives could buy
~~fcas.
The Siod< (fur! S!(iiioll Agents' Plan
This group in;;\'ck:'; th': Tn:ljor handling and selling
agents ~ind h~tS ~I:,)Cut S2.5 Ir;il}iou invested in \voal
storc~ and play!.
'.
. ,.
.
Bnefly It lS ;;gamsl acqulSll!O!l but m favour of
handlifig econcllnii:":. An Authority would be established
to mate imnlCf.blc. payments 10 farmers on the
, d vaWl;,
'
;:;
appr,<llse.,
Oir "
Inei)' \':00"1 to cant rot1 woo.1 ,jaws
on
to the mark~~t. tq JnlrOQuce \vool standards and to
participate v.'ilh [he industry in improvements 1.11
handling ,md selling, Later, a marketing Corporation
might be set up to b,lY and sell wool 1.11 o~en
can retition.
2.
3. The W'col Buyers' Association Plan
AcqLlisiticJJl is favoured. BO\vcver, the authority
\vonld dispose Crt \-'-.'001 at Clllctjon or at auction deter-
111:ned pr-jces~ tLr\.lugh the ex.isting buyer structure
(accredited e;',pcJ; leE-). The (iutllc1ritv would not trade in
wool itself e>;c~p'~ tllIOUgh a E121:kcting unit mainly
COficemcd witll J);:\V product development.
4.
The Fcde:'afioJI of New Zcai([)W~ Wool f.,1erchants'
[-)lan
r1
(r.-:~.pPGS?u
)
to a~y I8:!.-171 ?.!: acqulSI~iJon.
Ule \'1001 CC;liTl'.!~SIOn would become a
0
ft
•••
.
tradmg
org:o:riization v;:ilh Fo\\'cr to purcbase wool and sell
direct to world m;'rb:ts or as otherwise seen fit. It
yvou1d thus be ~·r!211~ii;.:~r \vith lJSer rcquirelnents, and in
a position to ,'f;C;.:;'[::;ke market development.
5. Assesstnent of
]1iU17S
Comider these T,b:1S on the basis of needs for wool
i~1 the \vorld .t,~::.\ii,~ m::rket place: .The Board/Corpo~a­
tlOn proposal b U~C only one \\'HlCh has all the maJor
elements required, The \Vcoi Buyers' plan is thoughtful.
The alterm,tives T:1!JctlY rct1ect the protection of special
ii1tcr~st )';roup~ i.h~\\c:v~r iegitim:ttc ,this may be). They
al;;o 1,1Olcate Jtl~,t 1;;.1'/ mtractable ttw problems are.
I~. "fHE
.P. . NTI-/~\ t.\~tl1':\IT10N
R(~form
ARCl)~\.'lENTS
prop,,:,etls involving acqUISItIon by an
organization aC1irl'c. under 1cc'islative authority have
becI" mrlinly cri: ic;;~.,:~d on the folio\ving grounds:
Incthod:
bCCi1
operating by and Jar[~e s~lcccssfully over a lonrr
period, to cficctivcl:/ di:;posc of the \\'001 clil)':
Further, it is con';lantly :.mdcrgoi;l[~ change' Cl;ld
improvement as the market place: (;ic!z:tes,
tiOil 8S
great. activity in thess
S'li/CS
Jt is claimed tlwt the present method has
.1..1
wool from lhe CC';pur:;tiun. To contain price fiuctualiens the sellini', ~;c:",;un would be extended and a buffer
stockpile wouJcf lv: created. Sale by sample would be
cxtcndl'G and the ]11:m ber of type's Standardized. So
1111lch for tbe plans.
Given llon-acqui:;i(icIl, the Corporation should be
putting ll1ajor eflurt::., jnto rn2rket research (e.g. user
nc:x:ds) (tnd dc\,( L ';';<lC,iL bUl GOCS not show signs of
C:hongiu,,"-: n prO~'C!l
3. Cost effectiveness:
The setti!1~~ un of vel another or['aniz2.tion in the
marketing ~ d;ain 11wst increase ~ c('s1.s. Fmthermore, it will be large, bureaucratic and cmploy
salaried starr \vithout a stake in the product.
Hencc it must operate inefiiciently.
4. GOFcrnmcllt control:
The Authority is set up under Government
legislation, has Government nomir:ees on its
Board and would be supported by Government
funds if necessary. It is thus under the influence
of Government and m8V Dot have the necessary
commercial o:'jentalion. 'Also, at some later stat::;',
Government could decide to nationalise ihc
industry, the groundwork: having already been
laid. ' / ' .
..
5. Interfering with suppJy and demand in tile martet
place ,md disrupting trading channels. This was
basical1v a vic\v pnt f'of\vard bv cxistin~ traders.
In f8ct aC(111isi'~ ion ('ould discourage the continuing
involvement of commercial on:anizations with their
capital and expertise and contact's with users.
F.
SUM"lARY
Reform in the marketing cd' \\'001 has been under
intense discussion for the -last 2-3 veal's. The most
controycrsial and far-reaching element' 0;: reform is the
setting up of an authority 1.0 acquire and market 0.11
woo1.
This paper has examined the cc\mpetitive position
of wool in the world textile market in order to establish
criteria for a marketing system best suited to enhance
wool's competitive abiiity, The conclusion is that a
single authOlity participating in and exercising control
in selling, handling and transport and engaging in market research is necessary. There are some valid objections to such a system but from the point of view of the
economy as a whole potentiai benefits exceed potential
costs.
Meafit;me the Ne\v Zealand \\1001 Marketing Corporation has had to open,te ,vithout acquisition and is
making nil progress in reform. It is unlikely that the
present members of the Electoral Committee will agree
to acquisition so the Corporation will continue to be
ineffectual and a target for "told you so's". A substantial
fall in wo"l prices \\'ould cause 'producer intransigence
to collapse but such a drop is unlikely in the ncar
future. A record of commercial success by the proposed
Australian or South African Corporations could rally
gro\ver support here but results may not be apparent for
some time. Accordingly the great New Zealand wool
debate will drag on for some time yet with a wool
marketing system of bygone days teetering precariously
on an antiquated but all so venerable foundation.
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